Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the company's common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The company's common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the conversion value of the issue.
A) $1,000
B) $880
C) $1,136
D) $1,120

Question

Quizplus · Accepted Answer

The conversion value of the issue is determined by the current market price of the stock times the number of shares into which the debenture can be converted. Since the conversion price is $25, one debenture can be converted into $1,000/$25 = 40 shares. With the stock currently at $22 per share, the conversion value is 40 shares * $22/share = $880.

Rizzo Company Has Debentures ($1,000 Par) Outstanding That Are Convertible